“Tenants face missing out on energy bill savings after the government caved in to landlords’ demands by lowering a cap on the costs they face to upgrade Britain’s draughtiest homes.

Landlords must improve the energy efficiency of F- and G-rated homes from next April under new regulations designed to protect vulnerable tenants and cut carbon emissions.

But on Tuesday the government said the costs of the upgrade would be capped at £2,500, half what officials had originally told buy-to-let landlords to expect. The total energy bill savings is put at £337m.

The government’s own assessment warned that the lower cap means only 139,200 households in England and Wales will benefit from better insulation by April 2020. That is 121,000 fewer than if the cap was at £5,000.

Campaigners and industry groups said the change left ministers’ ambitions of tackling fuel poverty in tatters.

“This could leave a gaping hole in the government’s plans to meet its own fuel poverty targets,” said Richard Twinn, policy adviser at the UK Green Building Council.

The Association for Conservation of Energy said the government had “missed a big opportunity” to improve the efficiency of thousands of homes.

Officials said the lower cap was necessary to protect owners by ensuring “that landlords of F and G rated private rented properties are not faced with an excessive cost burden”.

The government also said the changes were necessary because landlords’ access to finance for energy-saving measures had become harder since the policy was first proposed.

One green energy charity accused Theresa May of putting landlords’ interests ahead of tenants. Max Wakefield, a campaigner at 10:10 Climate Action, said: “The prime minister claims to be prioritising controlling domestic energy costs, but in reality policy is being designed to suit landlords. …”

“Hundreds of thousands of renters will now be left wondering when, if ever, they can expect to live in a decent home.”

But the National Landlords Association was not happy either, calling the proposal a “complete farce”. It said there was a risk landlords who still could not afford the upgrades would leave properties empty and unimproved. …”